The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "Form 10-K"). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Item 1A.-Risk Factors," in our Form 10-K.
Except as the context otherwise indicates, the terms "
Overview
We are a leading provider of critical decision support tools and services for the global investment community. Leveraging our knowledge of the global investment process and our expertise in research, data and technology, our actionable solutions1 power better investment decisions by enabling our clients to understand and analyze key drivers of risk and return and confidently and efficiently build more effective portfolios. Investors all over the world use our tools and services to gain insight and improve transparency throughout their investment processes, including to help define their investment universe, inform and analyze their asset allocation and portfolio construction decisions, measure and manage portfolio performance and risk, conduct performance attribution, implement sustainable and other investment strategies, design and issue ETFs and other index-enabled financial products, and facilitate reporting to stakeholders. Our industry-leading, research-enhanced products and services include indexes; portfolio construction and risk management analytics; ESG research and ratings; and real estate benchmarks, return-analytics and market insights. Through our integrated franchise we provide solutions across our products and services to support our clients' dynamic and complex needs. We are flexible in the delivery of our content and capabilities, much of which can be accessed by our clients through multiple channels and platforms.
We are focused on staying at the forefront of investment trends to address the evolving needs of our clients in a changing industry. In order to most effectively serve our clients, we are committed to driving an integrated solutions-based approach, achieving service excellence, enhancing our differentiated research and content, and delivering flexible, cutting-edge technology and platforms.
Our clients comprise a wide spectrum of the global investment industry and include the following key client types:
• Asset owners (pension funds, endowments, foundations, central banks,
sovereign wealth funds, family offices and insurance companies)
• Asset managers (institutional funds and accounts, mutual funds, hedge
funds, ETFs, insurance products, private banks and real estate investment
trusts)
• Financial intermediaries (banks, broker-dealers, exchanges, custodians,
trust companies and investment consultants) • Wealth managers (including an increasing number of "robo-advisors") As ofJune 30, 2020 , we served over 7,800 clients in more than 90 countries. To calculate the number of clients, we use the shipping address of the ultimate customer utilizing the product, which counts affiliates, user locations or business units within a single organization as separate clients. If we aggregate all related clients under their respective parent entity, the number of clients would be over 4,300, as ofJune 30, 2020 . As ofJune 30, 2020 , we had offices in more than 35 cities across more than 22 countries to help serve our diverse client base, with 47.4% of our revenues coming from clients in theAmericas , 37.0% in EMEA and 15.6% inAsia andAustralia . Our principal business model is generally to license annual, recurring subscriptions for the majority of our Index, Analytics and ESG products and services for a fee due in advance of the service period. We also license annual recurring subscriptions for the majority of our Real Estate products for a fee which is primarily paid in arrears after the product is delivered, with the exception of the Market Information product for which the fees are generally paid in advance. A portion of our fees comes from clients who use our indexes as the basis for index-linked investment products. Such fees are primarily based on a client's assets under management ("AUM"), trading volumes and fee levels.
1 The term "solutions" as used throughout this Quarterly Report on Form 10-Q
refers to the use of our products or services by our clients to help them achieve their objectives. 23
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In evaluating our financial performance, we focus on revenue and profit growth, including results accounted for under accounting principles generally accepted inthe United States ("GAAP") as well as non-GAAP measures, for the Company as a whole and by operating segment. In addition, we focus on operating metrics, includingRun Rate , subscription sales and Retention Rate, to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our profits into excess cash in the future. Our growth strategy includes: (a) expanding leadership in research-enhanced content, (b) strengthening existing and new client relationships by providing solutions, (c) improving access to our solutions through cutting-edge technology and platforms, (d) expanding value-added service offerings and (e) executing strategic relationships and acquisitions with complementary content and technology companies. In the discussion that follows, we provide certain variances excluding the impact of foreign currency exchange rate fluctuations. Foreign currency exchange rate fluctuations reflect the difference between the current period results as reported compared to the current period results recalculated using the foreign currency exchange rates in effect for the comparable prior period. While operating revenues adjusted for the impact of foreign currency fluctuations includes asset-based fees that have been adjusted for the impact of foreign currency fluctuations, the underlying AUM, which is the primary component of asset-based fees, is not adjusted for foreign currency fluctuations. Approximately two-thirds of the AUM are invested in securities denominated in currencies other than theU.S. dollar, and accordingly, any such impact is excluded from the disclosed foreign currency-adjusted variances.
The discussion of our results of operations for the three and six months ended
Results of Operations The following table presents the results of operations for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 % Change (in thousands, except per share data) Operating revenues$ 409,616 $ 385,558 6.2 %$ 826,396 $ 756,939 9.2 % Operating expenses: Cost of revenues 70,456 71,975 (2.1 %) 145,065 154,321 (6.0 %) Selling and marketing 51,617 51,657 (0.1 %) 107,166 107,705 (0.5 %) Research and development 22,534 23,752 (5.1 %) 49,096 46,924 4.6 % General and administrative 28,309 26,378 7.3 % 59,142 53,875 9.8 %
Amortization of intangible assets 14,062 12,013 17.1 %
27,838 23,806 16.9 % Depreciation and amortization of property, equipment and leasehold improvements 7,463 7,405 0.8 % 15,030 15,255 (1.5 %) Total operating expenses 194,441 193,180 0.7 % 403,337 401,886 0.4 % Operating income 215,175 192,378 11.9 % 423,059 355,053 19.2 % Other expense (income), net 76,008 32,633 132.9 % 121,043 67,016 80.6 % Income before provision for income taxes 139,167 159,745 (12.9 %) 302,016 288,037 4.9 % Provision for income taxes 24,044 34,055 (29.4 %) 38,768 (15,845 ) 344.7 % Net income$ 115,123 $ 125,690 (8.4 %)$ 263,248 $ 303,882 (13.4 %)
Earnings per basic common share
Earnings per diluted common share
$ 3.10 $ 3.55 (12.7 %) Operating margin 52.5 % 49.9 % 51.2 % 46.9 % Operating Revenues Our revenues are grouped by the following types: recurring subscriptions, asset-based fees and non-recurring. We also group revenues by major product or reportable segment as follows: Index, Analytics and All Other, which includes the ESG and Real Estate product lines. 24 --------------------------------------------------------------------------------
The following table presents operating revenues by type for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Recurring subscriptions$ 309,884 $ 289,149 7.2 %$ 614,309 $ 571,513 7.5 % Asset-based fees 88,075 87,733 0.4 % 188,271 169,541 11.0 % Non-recurring 11,657 8,676 34.4 % 23,816 15,885 49.9 % Total operating revenues$ 409,616 $ 385,558 6.2 %$ 826,396 $ 756,939 9.2 % Total operating revenues for the three months endedJune 30, 2020 increased 6.2% to$409.6 million compared to$385.6 million for the three months endedJune 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 6.4% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 9.2%, growing to$826.4 million compared to$756.9 million for the six months endedJune 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 9.3% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . As a result of the impact of the COVID-19 pandemic, growth in operating revenues from recurring subscriptions may moderate in the near term. In addition, the volatility in the global equity markets may adversely impact AUM levels which in turn may impact future operating revenues from asset-based fees. Operating revenues from recurring subscriptions for the three months endedJune 30, 2020 increased 7.2% to$309.9 million compared to$289.1 million for the three months endedJune 30, 2019 , primarily driven by growth in Index products, which increased$13.3 million , or 10.0%, growth in ESG products, which increased$4.8 million , or 22.7%, and growth in Analytics products, which increased$4.5 million , or 3.7%. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 7.4% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 7.5%, growing to$614.3 million compared to$571.5 million for the six months endedJune 30, 2019 , primarily driven by growth in Index products, which increased$25.4 million , or 9.8%, growth in Analytics products, which increased$8.4 million , or 3.5%, and growth in ESG products, which increased$8.3 million , or 19.6%. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 7.7% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Operating revenues from asset-based fees for the three months endedJune 30, 2020 increased 0.4% to$88.1 million compared to$87.7 million for the three months endedJune 30, 2019 . The increase in asset-based fees was driven by a strong increase in revenues from exchange traded futures and options contracts linked toMSCI indexes and an increase in revenues from non-ETF indexed funds linked toMSCI indexes, offset by a decline in revenues from ETFs linked toMSCI indexes. The increase in revenues from exchange traded futures and options contracts linked toMSCI indexes was primarily driven by price increases. Revenue growth from non-ETF indexed funds linked toMSCI indexes was primarily driven by an increase in average AUM. The decline in revenues from ETFs linked toMSCI indexes was driven by a 4.3% decrease in average AUM and by the impact of a change in product mix. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. For the six months endedJune 30, 2020 , revenues from asset-based fees increased 11.0% to$188.3 million compared to$169.5 million for the six months endedJune 30, 2019 . The increase in asset-based fees was primarily driven by a strong increase in revenues from exchange traded futures and options contracts linked toMSCI indexes, primarily driven by price and volume increases. The increase was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible.
The following table presents the value of AUM in equity ETFs linked to
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Period Ended 2019 2020 March June September December March June (in billions) 31, 30, 30, 31, 31, 30, AUM in equity ETFs linked toMSCI indexes(1), (2), (3)$ 802.2 $ 819.3 $ 815.0
Sequential Change in Value Market Appreciation/(Depreciation)$ 78.3 $ 14.9 $ (9.2 ) $ 63.5 $ (216.5 ) $ 117.4 Cash Inflows 28.3 2.2 4.9 55.9 (8.4 ) (1.5 ) Total Change$ 106.6 $ 17.1 $ (4.3 ) $ 119.4 $ (224.9 ) $ 115.9
The following table presents the average value of AUM in equity ETFs linked to
2019 2020 (in billions) March June September December March June AUM in equity ETFs linked toMSCI indexes(1), (2), (3) Quarterly average$ 766.0 $ 811.4 $ 810.9 $ 869.1 $ 877.1 $ 776.9 Year-to-date average$ 766.0 $ 788.7 $ 796.1 $ 814.4 $ 877.1 $ 827.0
(1) The historical values of the AUM in equity ETFs linked to our indexes as of
the last day of the month and the monthly average balance can be found under
the link "AUM in Equity ETFs Linked to
Relations homepage at http://ir.msci.com. This information is updated
mid-month each month. Information contained on our website is not
incorporated by reference into this Quarterly Report on Form 10-Q or any
other report filed with the
Exchange Traded Notes, the value of which is less than 1.0% of the AUM
amounts presented.
(2) The values for periods prior to
Bloomberg and
were based on data from Refinitiv and
reported on a delayed basis.
(3) The value of AUM in equity ETFs linked to
multiplying the equity ETF net asset value by the number of shares outstanding. The average value of AUM in equity ETFs linked toMSCI equity indexes for the three months endedJune 30, 2020 was$776.9 billion , down$34.5 billion , or 4.3%, from$811.4 billion for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , it was$827.0 billion , up$38.3 billion , or 4.9%, from$788.7 billion for the six months endedJune 30, 2019 . Non-recurring revenues for the three months endedJune 30, 2020 increased 34.4% to$11.7 million compared to$8.7 million for the three months endedJune 30, 2019 , primarily driven by growth in Index products, which increased$3.8 million , or 66.2%. For the six months endedJune 30, 2020 , the increase was 49.9%, growing to$23.8 million compared to$15.9 million for the six months endedJune 30, 2019 , primarily driven by growth in Index products, which increased$7.7 million , or 70.1%.
The following table presents operating revenues by reportable segment and revenue type for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues: Index Recurring subscriptions$ 145,404 $ 132,145 10.0 %$ 285,244 $ 259,819 9.8 % Asset-based fees 88,075 87,733 0.4 % 188,271 169,541 11.0 % Non-recurring 9,429 5,672 66.2 % 18,649 10,963 70.1 % Index total 242,908 225,550 7.7 % 492,164 440,323 11.8 % Analytics Recurring subscriptions 126,189 121,699 3.7 % 250,254 241,809 3.5 % Non-recurring 1,374 1,982 (30.7 %) 2,817 3,307 (14.8 %) Analytics total 127,563 123,681 3.1 % 253,071 245,116 3.2 % All Other Recurring subscriptions 38,291 35,305 8.5 % 78,811 69,885 12.8 % Non-recurring 854 1,022 (16.4 %) 2,350 1,615 45.5 % All Other total 39,145 36,327 7.8 % 81,161 71,500 13.5 % Total operating revenues$ 409,616 $ 385,558 6.2 %$ 826,396 $ 756,939 9.2 % 26
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Refer to the section titled "Segment Results" that follows for further discussion of segment revenues.
Operating Expenses
We group our operating expenses into the following activity categories:
• Cost of revenues; • Selling and marketing; • Research and development ("R&D"); • General and administrative ("G&A"); • Amortization of intangible assets; and
• Depreciation and amortization of property, equipment and leasehold
improvements.
Costs are assigned to these activity categories based on the nature of the expense or, when not directly attributable, an estimated allocation based on the type of effort involved.
The following table presents operating expenses by activity category for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating expenses: Cost of revenues$ 70,456 $ 71,975 (2.1 %)$ 145,065 $ 154,321 (6.0 %) Selling and marketing 51,617 51,657 (0.1 %) 107,166 107,705 (0.5 %) Research and development 22,534 23,752 (5.1 %) 49,096 46,924 4.6 % General and administrative 28,309 26,378 7.3 % 59,142 53,875 9.8 % Amortization of intangible assets 14,062 12,013 17.1 % 27,838 23,806 16.9 % Depreciation and amortization of property, equipment and leasehold improvements 7,463 7,405 0.8 % 15,030 15,255 (1.5 %) Total operating expenses$ 194,441 $ 193,180 0.7 %$ 403,337 $ 401,886 0.4 % Total operating expenses for the three months endedJune 30, 2020 increased 0.7% to$194.4 million compared to$193.2 million for the three months endedJune 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.7% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 0.4%, growing to$403.3 million compared to$401.9 million for the six months endedJune 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 1.9% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 .
Cost of Revenues
Cost of revenues expenses consist of costs related to the production and servicing of our products and services and primarily includes related information technology costs, including data center, platform and infrastructure costs; costs to acquire, produce and maintain market data information; costs of research to support and maintain existing products; costs of product management teams; costs of client service and consultant teams to support customer needs; as well as other support costs directly attributable to the cost of revenues including certain human resources, finance and legal costs. Cost of revenues for the three months endedJune 30, 2020 decreased 2.1% to$70.5 million compared to$72.0 million for the three months endedJune 30, 2019 , reflecting decreases across the Analytics and Index reportable segments, partially offset by an increase in the All Other reportable segment. The change was driven by decreases in compensation and benefits costs, primarily relating to lower incentive compensation and benefits costs, and decreases in non-compensation costs, including travel and entertainment costs. For the six months endedJune 30, 2020 , the decrease was 6.0% to$145.1 million compared to$154.3 million for the six months endedJune 30, 2019 , reflecting decreases across the Analytics and Index reportable segments, partially offset by an increase in the All Other reportable segment. The change was driven by the absence of$7.0 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019, and decreases in other compensation and benefits costs, primarily relating to lower incentive compensation. 27 --------------------------------------------------------------------------------
Selling and Marketing Selling and marketing expenses consist of costs associated with acquiring new clients or selling new products or product renewals to existing clients and primarily includes the costs of our sales and marketing teams, as well as costs incurred in other groups associated with acquiring new business, including product management, research, technology and sales operations. Selling and marketing expenses for the three months endedJune 30, 2020 decreased 0.1% to$51.6 million compared to$51.7 million for the three months endedJune 30, 2019 , driven by lower costs in the Index reportable segment partially offset by higher costs in the All Other and Analytics reportable segments. The change was driven by decreases in non-compensation costs, including travel and entertainment costs and marketing costs, partially offset by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation. For the six months endedJune 30, 2020 , the decrease was 0.5%, declining to$107.2 million compared to$107.7 million for the six months endedJune 30, 2019 , driven by lower costs in the Index reportable segment, partially offset by higher costs in the Analytics and All Other reportable segments. The change was driven by the absence of$4.5 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019. Additionally, there were increases in compensation and benefits costs, primarily relating to higher wages and salaries and benefits costs, partially offset by lower non-compensation costs, including travel and entertainment costs and marketing costs.
Research and Development
R&D expenses consist of the costs to develop new or enhance existing products and the costs to develop new or improved technology and service platforms for the delivery of our products and services and primarily include the costs of development, research, product management, project management and the technology support associated with these efforts. R&D expenses for the three months endedJune 30, 2020 decreased 5.1% to$22.5 million compared to$23.8 million for the three months endedJune 30, 2019 , reflecting lower investments in the Analytics reportable segment, partially offset by higher investment in the All Other and Index reportable segments. The change was driven by decreases in non-compensation costs, including travel and entertainment and recruiting costs, as well as decreases in compensation and benefits costs, primarily relating to lower incentive compensation and benefits costs. For the six months endedJune 30, 2020 , the increase was 4.6%, growing to$49.1 million compared to$46.9 million for the six months endedJune 30, 2019 , reflecting higher investments in the All Other and Index reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, including benefits, severance, wages and salaries and incentive compensation costs.
General and Administrative
G&A expenses consist of costs primarily related to finance operations, human resources, office of the CEO, legal, corporate technology, corporate development and certain other administrative costs that are not directly attributed, but are instead allocated, to a product or service. G&A expenses for the three months endedJune 30, 2020 increased 7.3% to$28.3 million compared to$26.4 million for the three months endedJune 30, 2019 , reflecting increases across all three reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation and wages and salaries, partially offset by lower severance costs. For the six months endedJune 30, 2020 , the increase was 9.8%, growing to$59.1 million compared to$53.9 million for the six months endedJune 30, 2019 , reflecting increases across all three reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, wages and salaries and benefits costs, partially offset by the absence of$3.5 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019.
The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the periods indicated:
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Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Compensation and benefits$ 128,803 $ 124,314 3.6 %$ 266,065 $ 266,487 (0.2 %) Non-compensation expenses 44,113 49,448 (10.8 %) 94,404 96,338 (2.0 %) Amortization of intangible assets 14,062 12,013 17.1 % 27,838 23,806 16.9 % Depreciation and amortization of property, equipment and leasehold improvements 7,463 7,405 0.8 % 15,030 15,255 (1.5 %) Total operating expenses$ 194,441 $ 193,180 0.7 %$ 403,337 $ 401,886 0.4 % Compensation and Benefits Compensation and benefits costs are our most significant expense and typically represent approximately 65% of operating expenses or more than 70% of Adjusted EBITDA expenses. We had 3,513 and 3,266 employees as ofJune 30, 2020 and 2019, respectively, reflecting a 7.6% growth in the number of employees. Continued growth of our emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefit expenses. As ofJune 30, 2020 , 63.7% of our employees were located in emerging market centers compared to 62.8% as ofJune 30, 2019 . Compensation and benefits costs for the three months endedJune 30, 2020 increased 3.6% to$128.8 million compared to$124.3 million for the three months endedJune 30, 2019 , primarily driven by higher incentive compensation and wages and salaries, partially offset by lower severance costs.
For the six months ended
A significant portion of the incentive compensation component of operating expenses is based on the achievement of a number of financial and operating metrics. In a scenario where operating revenue growth and profitability moderate as a result of the impact of the COVID-19 pandemic, incentive compensation is expected to decrease accordingly.
Non-Compensation Expenses
Non-compensation expenses for the three months endedJune 30, 2020 decreased 10.8% to$44.1 million compared to$49.4 million for the three months endedJune 30, 2019 , primarily driven by lower travel and entertainment costs, marketing costs and recruiting costs, partially offset by higher information technology costs. For the six months endedJune 30, 2020 , the decrease was 2.0%, declining to$94.4 million compared to$96.3 million for the six months endedJune 30, 2019 , primarily driven by lower travel and entertainment costs, marketing costs and recruiting costs, partially offset by higher information technology costs, professional fees and occupancy costs. Fixed costs constitute a significant portion of the non-compensation component of operating expenses. The discretionary non-compensation component of operating expenses could, however, be reduced in the near-term in a scenario where operating revenue growth moderates as a result of the COVID-19 pandemic.
Amortization of Intangible Assets
Amortization of intangible assets expense relates to definite-lived intangible assets arising from past acquisitions and internal capitalized software projects recognized over their estimated useful lives. Amortization of intangible assets expense for the three months endedJune 30, 2020 increased 17.1% to$14.1 million compared to$12.0 million for the three months endedJune 30, 2019 , primarily driven by higher amortization of internally developed capitalized software.
For the six months ended
Depreciation and Amortization of Property, Equipment and Leasehold Improvements
Depreciation and amortization of property, equipment and leasehold improvements consists of expenses related to depreciating or amortizing the cost of furniture and fixtures, computer and related equipment and leasehold improvements over the estimated useful life of the assets. Depreciation and amortization of property, equipment and leasehold improvements for the three months endedJune 30, 2020 of$7.5 million remained consistent compared to the three months endedJune 30, 2019 . 29
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For the six months ended
Other Expense (Income), Net
Other expense (income), net for the three months endedJune 30, 2020 increased 132.9% to$76.0 million compared to$32.6 million for the three months endedJune 30, 2019 . The increase in net expenses was primarily driven by the$35.0 million loss on debt extinguishment recognized on the redemption of all of the outstanding$800.0 million aggregate principal amount of the 2025 Senior Notes ("2025 Senior Notes Redemption"). The loss on debt extinguishment associated with the 2025 Senior Notes included an applicable premium of approximately$29.5 million (as defined in the indenture governing the terms of the 2025 Senior Notes) and the write-off of approximately$5.5 million of unamortized debt issuance costs. In addition, the increase reflects higher interest expense associated with the higher outstanding debt during the three months endedJune 30, 2020 and lower interest income due to lower rates earned on cash balances. For the six months endedJune 30, 2020 , it increased 80.6% to$121.0 million compared to$67.0 million for the six months endedJune 30, 2019 . The increase in net expenses was primarily driven by the$35.0 million and$10.0 million loss on debt extinguishment associated with the 2025 Senior Notes Redemption and the redemption of all of the remaining$300.0 million of the 5.250% Senior Notes due 2024 ("2024 Senior Notes Redemption"), respectively. The loss on debt extinguishment associated with the 2024 Senior Notes Redemption includes a redemption price of approximately$7.9 million (as set forth in the indenture governing the terms of the 2024 Senior Notes) and the write-off of approximately$2.1 million of unamortized debt issuance costs. In addition, the increase reflects higher interest expense associated with the higher outstanding debt during the six months endedJune 30, 2020 and lower interest income due to lower rates earned on cash balances, partially offset by higher foreign currency exchange gains.
Income Taxes
The Company's provision for income taxes for the three months endedJune 30, 2020 and 2019 was$24.0 million and$34.1 million , respectively. These amounts reflect effective tax rates of 17.3% and 21.3% for the three months endedJune 30, 2020 and 2019, respectively. For the three months endedJune 30, 2020 , the effective tax rate of 17.3% reflects the Company's estimate of the effective tax rate for the period which was impacted by certain favorable discrete items totaling$11.7 million . These discrete items primarily related to the$9.0 million tax impact of loss on debt extinguishment recognized during the period on the 2025 Senior Notes Redemption and$2.3 million related to the conversion of equity awards during the period. In addition, the effective tax rate was impacted by a beneficial geographic mix of earnings. For the three months endedJune 30, 2019 , the effective tax rate of 21.3% reflected the Company's estimate of the effective tax rate for the period which was impacted by a beneficial geographic mix of earnings and lower anticipated taxes on repatriation of foreign earnings. In addition, the effective tax rate was impacted by certain discrete items totaling$0.8 million . These discrete items included$1.2 million of excess tax benefits related to the conversion of equity awards. The Company's provision for income taxes for the six months endedJune 30, 2020 and 2019 was an expense of$38.8 million and a benefit of$15.8 million , respectively. These amounts reflect effective tax rates of 12.8% and negative 5.5% for the six months endedJune 30, 2020 and 2019, respectively. For the six months endedJune 30, 2020 , the effective tax rate of 12.8% reflects the Company's estimate of the effective tax rate for the period which was impacted by certain discrete items totaling$34.1 million . These discrete items primarily related to$21.5 million of excess tax benefits recognized on the conversion of equity awards during the period and$11.5 million related to the tax impact of loss on debt extinguishment recognized during the period on the 2024 Senior Notes Redemption and 2025 Senior Notes Redemption. Also included in the discrete items is a$0.8 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings. In addition, the effective tax rate was impacted by a beneficial geographic mix of earnings. For the six months endedJune 30, 2019 , the effective tax rate of negative 5.5% reflected the Company's estimate of the effective tax rate for the period and was impacted by certain discrete items totaling$78.6 million . These discrete items primarily related to$66.6 million of excess tax benefits recognized on the conversion of the 2016 Multi-Year PSUs and$11.0 million of excess tax benefits related to the conversion of other equity awards recognized during the period. In addition, the effective tax rate was impacted by a beneficial geographic mix of earnings.
Net Income
As a result of the factors described above, net income for the three months endedJune 30, 2020 decreased 8.4% to$115.1 million compared to$125.7 million for the three months endedJune 30, 2019 and for the six months endedJune 30, 2020 , it decreased 13.4% to$263.2 million compared to$303.9 million for the six months endedJune 30, 2019 . 30 --------------------------------------------------------------------------------
Weighted Average Shares The weighted average shares outstanding used to calculate basic and diluted earnings per share for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 decreased by 1.3% and 1.2%, respectively. The decreases primarily reflect the impact of share repurchases made prior toJune 30, 2020 pursuant to the 2019 Repurchase Program and the vesting of the restricted stock units that were included in the dilutive share count in the prior year.
For the six months ended
Adjusted EBITDA "Adjusted EBITDA," a non-GAAP measure used by management to assess operating performance, is defined as net income before (1) provision for income taxes, (2) other expense (income), net, (3) depreciation and amortization of property, equipment and leasehold improvements, (4) amortization of intangible assets and, at times, (5) certain other transactions or adjustments, including the impact related to the vesting of the 2016 Multi-Year PSUs. "Adjusted EBITDA expenses," a non-GAAP measure used by management to assess operating performance, is defined as operating expenses less depreciation and amortization of property, equipment and leasehold improvements and amortization of intangible assets and, at times, certain other transactions or adjustments, including the impact related to the vesting of the 2016 Multi-Year PSUs. Adjusted EBITDA and Adjusted EBITDA expenses are believed to be meaningful measures of the operating performance of the Company because they adjust for significant one-time, unusual or non-recurring items as well as eliminate the accounting effects of certain capital spending and acquisitions that do not directly affect what management considers to be the Company's ongoing operating performance in the period. All companies do not calculate adjusted EBITDA and adjusted EBITDA expenses in the same way. These measures can differ significantly from company to company depending on, among other things, long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Accordingly, the Company's computation of the Adjusted EBITDA and Adjusted EBITDA expenses measures may not be comparable to similarly titled measures computed by other companies. The following table presents the calculation of Adjusted EBITDA for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues$ 409,616 $ 385,558 6.2 %$ 826,396 $ 756,939 9.2 % Adjusted EBITDA expenses 172,916 173,762 (0.5 %) 360,469 347,436 3.8 % Adjusted EBITDA$ 236,700 $ 211,796 11.8 %$ 465,927 $ 409,503 13.8 % Adjusted EBITDA margin % 57.8 % 54.9 % 56.4 % 54.1 % Operating margin % 52.5 % 49.9 % 51.2 % 46.9 % Adjusted EBITDA for the three months endedJune 30, 2020 increased 11.8% to$236.7 million compared to$211.8 million for the three months endedJune 30, 2019 . Adjusted EBITDA margin for the three months endedJune 30, 2020 increased to 57.8% compared to 54.9% for the three months endedJune 30, 2019 . The increase in Adjusted EBITDA margin reflects growth in operating revenues and a decline in Adjusted EBITDA expenses. For the six months endedJune 30, 2020 , Adjusted EBITDA increased 13.8% to$465.9 million compared to$409.5 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , Adjusted EBITDA margin increased to 56.4% compared to 54.1% for the six months endedJune 30, 2019 . The increase in Adjusted EBITDA margin reflects a higher rate of growth in operating revenues as compared to the rate of growth of Adjusted EBITDA expenses. 31 --------------------------------------------------------------------------------
Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses
The following table presents the reconciliation of Adjusted EBITDA to net income for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Index Adjusted EBITDA$ 183,256 $ 163,915 $ 366,843 $ 316,126 Analytics Adjusted EBITDA 46,167 39,071 82,484 75,469 All Other Adjusted EBITDA 7,277 8,810 16,600 17,908 Consolidated Adjusted EBITDA 236,700 211,796 465,927 409,503 2016 Multi-Year PSUs grant payroll tax expense - - - 15,389 Amortization of intangible assets 14,062 12,013 27,838 23,806 Depreciation and amortization of property, equipment and leasehold improvements 7,463 7,405 15,030 15,255 Operating income 215,175 192,378 423,059 355,053 Other expense (income), net 76,008 32,633 121,043 67,016 Provision for income taxes 24,044 34,055 38,768 (15,845 ) Net income$ 115,123 $ 125,690 $ 263,248 $ 303,882
The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (in thousands) Index Adjusted EBITDA expenses$ 59,652 $ 61,635 $ 125,321 $ 124,197 Analytics Adjusted EBITDA expenses 81,396 84,610 170,587 169,647 All Other Adjusted EBITDA expenses 31,868 27,517 64,561 53,592 Consolidated Adjusted EBITDA expenses 172,916 173,762 360,469 347,436 2016 Multi-Year PSUs grant payroll tax expense - - - 15,389 Amortization of intangible assets 14,062 12,013 27,838 23,806 Depreciation and amortization of property, equipment and leasehold improvements 7,463 7,405 15,030 15,255 Total operating expenses$ 194,441 $ 193,180 $ 403,337 $ 401,886
The discussion of the segment results is presented below.
Segment Results Index Segment The following table presents the results for the Index segment for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues: Recurring subscriptions$ 145,404 $ 132,145 10.0 %$ 285,244 $ 259,819 9.8 % Asset-based fees 88,075 87,733 0.4 % 188,271 169,541 11.0 % Non-recurring 9,429 5,672 66.2 % 18,649 10,963 70.1 % Operating revenues total 242,908 225,550 7.7 % 492,164 440,323 11.8 % Adjusted EBITDA expenses 59,652 61,635 (3.2 %) 125,321 124,197 0.9 % Adjusted EBITDA$ 183,256 $ 163,915 11.8 %$ 366,843 $ 316,126 16.0 % Adjusted EBITDA margin % 75.4 % 72.7 % 74.5 % 71.8 % 32
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Revenues related to Index products for the three months endedJune 30, 2020 increased 7.7% to$242.9 million compared to$225.6 million for the three months endedJune 30, 2019 and for the six months endedJune 30, 2020 , the increase was 11.8%, growing to$492.2 million compared to$440.3 million for the six months endedJune 30, 2019 . Recurring subscriptions for the three months endedJune 30, 2020 increased 10.0% to$145.4 million compared to$132.1 million for the three months endedJune 30, 2019 . The increase was primarily driven by strong growth in core products and factor and ESG/Climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible. For the six months endedJune 30, 2020 , the increase was 9.8%, growing to$285.2 million compared to$259.8 million for the six months endedJune 30, 2019 . The increase was driven by strong growth in core products and factor and ESG/Climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible. Revenues from asset-based fees for the three months endedJune 30, 2020 increased 0.4% to$88.1 million compared to$87.7 million for the three months endedJune 30, 2019 . The increase in asset-based fees was driven by a strong increase in revenues from exchange traded futures and options contracts linked toMSCI indexes and an increase in revenues from non-ETF indexed funds linked toMSCI indexes, offset by a decline in revenues from ETFs linked toMSCI indexes. The increase in revenues from exchange traded futures and options contracts linked toMSCI indexes was primarily driven by price increases. Revenue growth from non-ETF Indexed funds products linked toMSCI indexes was primarily driven by an increase in average AUM. The decline in revenues from ETFs linked toMSCI indexes was driven by a 4.3% decrease in average AUM and by the impact of a change in product mix. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. For the six months endedJune 30, 2020 , the increase was 11.0%, growing to$188.3 million compared to$169.5 million for the six months endedJune 30, 2019 . The increase in asset-based fees was primarily driven by a strong increase in revenues from exchange traded futures and options contracts linked toMSCI indexes, principally driven by price and volume increases. The increase was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. Non-recurring revenues for the three months endedJune 30, 2020 increased 66.2% to$9.4 million compared to$5.7 million for the three months endedJune 30, 2019 and for the six months endedJune 30, 2020 the increase was 70.1%, growing to$18.6 million compared to$11.0 million for the six months endedJune 30, 2019 . The increases for both the three and six months endedJune 30, 2020 were primarily driven by the recognition of higher fees resulting from the finalization of fees with clients during the respective periods. Index segment Adjusted EBITDA expenses for the three months endedJune 30, 2020 decreased 3.2% to$59.7 million compared to$61.6 million for the three months endedJune 30, 2019 , reflecting lower expenses across the selling and marketing and cost of revenues expense activity categories, partially offset by higher expenses across the G&A and R&D expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the decrease would have been 1.2% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 0.9%, growing to$125.3 million compared to$124.2 million for the six months endedJune 30, 2019 , reflecting higher expenses across the G&A and R&D expense activity categories, partially offset by lower expenses across the selling and marketing and cost of revenues expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.5% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 .
Analytics Segment
The following table presents the results for the Analytics segment for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues: Recurring subscriptions$ 126,189 $ 121,699 3.7 %$ 250,254 $ 241,809 3.5 % Non-recurring 1,374 1,982 (30.7 %) 2,817 3,307 (14.8 %) Operating revenues total 127,563 123,681 3.1 % 253,071 245,116 3.2 % Adjusted EBITDA expenses 81,396 84,610 (3.8 %) 170,587 169,647 0.6 % Adjusted EBITDA$ 46,167 $ 39,071 18.2 %$ 82,484 $ 75,469 9.3 % Adjusted EBITDA margin % 36.2 % 31.6 % 32.6 % 30.8 % 33
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Analytics segment revenues for the three months endedJune 30, 2020 increased 3.1% to$127.6 million compared to$123.7 million for the three months endedJune 30, 2019 , primarily driven by growth in Multi-Asset Class Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 3.0% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 3.2%, growing to$253.1 million compared to$245.1 million for the six months endedJune 30, 2019 , primarily driven by growth in Multi-Asset Class Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 3.2% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Analytics segment Adjusted EBITDA expenses for the three months endedJune 30, 2020 decreased 3.8% to$81.4 million compared to$84.6 million for the three months endedJune 30, 2019 , primarily driven by lower expenses across the cost of revenues and R&D expense activity categories, partially offset by higher expenses across the selling and marketing and G&A expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the decrease would have been 1.6% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the increase was 0.6%, growing to$170.6 million compared to$169.6 million for the six months endedJune 30, 2019 , primarily driven by higher expenses across the selling and marketing and G&A expense activity categories, partially offset by lower expenses across the cost of revenues and R&D expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.2% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . All Other Segment The following table presents the results for the All Other segment for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues: Recurring subscriptions$ 38,291 $ 35,305 8.5 %$ 78,811 $ 69,885 12.8 % Non-recurring 854 1,022 (16.4 %) 2,350 1,615 45.5 % Operating revenues total 39,145 36,327 7.8 % 81,161 71,500 13.5 % Adjusted EBITDA expenses 31,868 27,517 15.8 % 64,561 53,592 20.5 % Adjusted EBITDA$ 7,277 $ 8,810 (17.4 %)$ 16,600 $ 17,908 (7.3 %) Adjusted EBITDA margin % 18.6 % 24.3 % 20.5 % 25.0 % All Other segment revenues for the three months endedJune 30, 2020 increased 7.8% to$39.1 million compared to$36.3 million for the three months endedJune 30, 2019 . The increase in All Other revenues was driven by a$4.9 million , or 22.7%, increase in ESG revenues to$26.3 million , partially offset by a$2.1 million , or 13.8%, decrease in Real Estate revenues to$12.8 million . The increase in ESG revenues was driven by strong growth in the Ratings, Climate and Screening products. The decrease in Real Estate revenues was primarily driven by a decline in Enterprise Analytics product revenues. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG revenues would have increased 25.0%, All Other operating revenues would have increased 10.4% and Real Estate revenues would have decreased 10.7% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , All Other segment revenues increased 13.5% to$81.2 million compared to$71.5 million for the six months endedJune 30, 2019 . The increase in All Other revenues was driven by a$8.6 million , or 19.9%, increase in ESG revenues to$51.6 million and by a$1.1 million , or 3.9%, increase in Real Estate revenues to$29.6 million . The increase in ESG revenues was driven by strong growth in the Ratings, Climate and Screening products. The increase in Real Estate revenues was primarily driven by strong growth in our Global Intel products. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other operating revenues would have increased 15.7%, ESG revenues would have increased 21.6% and Real Estate revenues would have increased 6.9% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . All Other segment Adjusted EBITDA expenses for the three months endedJune 30, 2020 increased 15.8% to$31.9 million compared to$27.5 million for the three months endedJune 30, 2019 , driven by higher expenses attributable primarily to ESG operations. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 18.5% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . 34 --------------------------------------------------------------------------------
For the six months endedJune 30, 2020 , the increase was 20.5%, growing to$64.6 million compared to$53.6 million for the nine months endedSeptember 30, 2018 , driven by higher expenses attributable primarily to ESG operations. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 22.5% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 .Run Rate "Run Rate" estimates at a particular point in time the annualized value of the recurring revenues under our client license agreements ("Client Contracts") for the next 12 months, assuming all Client Contracts that come up for renewal are renewed and assuming then-current currency exchange rates, subject to the adjustments and exclusions described below. For any Client Contract where fees are linked to an investment product's assets or trading volume/fees, the Run Rate calculation reflects, for ETFs, the market value on the last trading day of the period, for futures and options, the most recent quarterly volumes and/or reported exchange fees, and for other non-ETF products, the most recent client-reported assets.Run Rate does not include fees associated with "one-time" and other non-recurring transactions. In addition, we add toRun Rate the annualized fee value of recurring new sales, whether to existing or new clients, when we execute Client Contracts, even though the license start date, and associated revenue recognition, may not be effective until a later date. We remove fromRun Rate the annualized fee value associated with products or services under any Client Contract with respect to which we have received a notice of termination or non-renewal during the period and have determined that such notice evidences the client's final decision to terminate or not renew the applicable products or services, even though such notice is not effective until a later date. Changes in our recurring revenues typically lag changes inRun Rate . The actual amount of recurring revenues we will realize over the following 12 months will differ fromRun Rate for numerous reasons, including: • fluctuations in revenues associated with new recurring sales; • modifications, cancellations and non-renewals of existing Client Contracts, subject to specified notice requirements;
• differences between the recurring license start date and the date the
Client Contract is executed due to, for example, contracts with onboarding
periods;
• fluctuations in asset-based fees, which may result from changes in certain
investment products' total expense ratios, market movements, including
foreign currency exchange rates, or from investment inflows into and outflows from investment products linked to our indexes;
• fluctuations in fees based on trading volumes of futures and options
contracts linked to our indexes;
• fluctuations in the number of hedge funds for which we provide investment
information and risk analysis to hedge fund investors; • price changes or discounts;
• revenue recognition differences under
to the timing of implementation and report deliveries for certain of our
products and services; • fluctuations in foreign currency exchange rates; and • the impact of acquisitions and divestitures. 35
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The following table presents the Run Rates as of the dates indicated and the growth percentages over the periods indicated:
As of June 30, June 30, % 2020 2019 Change (in thousands) Index: Recurring subscriptions$ 586,846 $ 531,590 10.4 % Asset-based fees 362,049 345,126 4.9 % Index total 948,895 876,716 8.2 % Analytics 534,039 503,969 6.0 % All Other 164,377 137,045 19.9 % Total Run Rate$ 1,647,311 $ 1,517,730 8.5 % Recurring subscriptions total$ 1,285,262 $ 1,172,604 9.6 % Asset-based fees 362,049 345,126 4.9 % Total Run Rate$ 1,647,311 $ 1,517,730 8.5 % TotalRun Rate grew 8.5% to$1,647.3 million as ofJune 30, 2020 compared to$1,517.7 million as ofJune 30, 2019 . Recurring subscriptionsRun Rate grew 9.6% to$1,285.3 million as ofJune 30, 2020 compared to$1,172.6 million as ofJune 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscriptionsRun Rate would have increased 9.8% as ofJune 30, 2020 compared toJune 30, 2019 .Run Rate from asset-based fees increased 4.9% to$362.0 million as ofJune 30, 2020 from$345.1 million as ofJune 30, 2019 , primarily driven by higher volume in futures and options, higher non-ETF indexed funds linked toMSCI indexes and by higher AUM in equity ETFs linked toMSCI indexes. Offsetting the impact of the increase in AUM in equity ETFs linked toMSCI indexes was a change in product mix, which was the primary driver of a decline in period-end basis point fees to 2.67 as ofJune 30, 2020 from 2.85 as ofJune 30, 2019 . As ofJune 30, 2020 , the value of AUM in equity ETFs linked toMSCI indexes was$825.4 billion , up$6.1 billion , or 0.7%, from$819.3 billion as ofJune 30, 2019 . The increase of$6.1 billion consisted of net inflows of$50.9 billion and a market depreciation of$44.8 billion . Index recurring subscriptionsRun Rate grew 10.4% to$586.8 million as ofJune 30, 2020 compared to$531.6 million as ofJune 30, 2019 , primarily driven by strong growth in core products, custom and specialized index products and factor and ESG/Climate index products, with growth across all our client segments.Run Rate from Analytics products increased 6.0% to$534.0 million as ofJune 30, 2020 compared to$504.0 million as ofJune 30, 2019 , primarily driven by growth in Multi-Asset Class Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, AnalyticsRun Rate would have increased 6.1% as ofJune 30, 2020 .Run Rate from All Other products increased 19.9% to$164.4 million as ofJune 30, 2020 compared to$137.0 million as ofJune 30, 2019 . The$27.4 million increase was primarily driven by a$24.8 million , or 27.9%, increase in ESG Run Rate to$113.7 million , and a$2.6 million , or 5.3%, increase in Real EstateRun Rate to$50.7 million . The increase in ESG Run Rate was primarily driven by strong growth in Ratings, Climate and Screening products. The increase in Real EstateRun Rate was primarily driven by growth in Global Intel products. Adjusting for the impact of foreign currency exchange rate fluctuations, All OtherRun Rate would have increased 21.1%, ESG Run Rate would have increased 28.5% and Real EstateRun Rate would have increased 7.5% as ofJune 30, 2020 compared toJune 30, 2019 . 36
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Sales Sales represents the annualized value of products and services clients commit to purchase fromMSCI and will result in additional operating revenues. Non-recurring sales represent the actual value of the customer agreements entered into during the period and are not a component ofRun Rate . New recurring subscription sales represent additional selling activities, such as new customer agreements, additions to existing agreements or increases in price that occurred during the period and are additions toRun Rate . Subscription cancellations reflect client activities during the period, such as discontinuing products and services and/or reductions in price, resulting in reductions toRun Rate . Net new recurring subscription sales represent the amount of new recurring subscription sales net of subscription cancellations during the period, which reflects the net impact toRun Rate during the period.
Total gross sales represent the sum of new recurring subscription sales and non-recurring sales. Total net sales represent the total gross sales net of the impact from subscription cancellations.
The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, % June 30, June 30, % 2020 2019 Change 2020 2019 Change (in thousands) New recurring subscription sales Index$ 20,276 $ 19,526 3.8 %$ 39,330 $ 36,855 6.7 % Analytics 14,979 13,669 9.6 % 26,197 26,420 (0.8 %) All Other 12,348 8,014 54.1 % 20,517 15,229 34.7 % New recurring subscription sales total 47,603 41,209 15.5 % 86,044 78,504 9.6 % Subscription cancellations Index (7,423 ) (3,601 ) 106.1 % (12,539 ) (7,967 ) 57.4 % Analytics (10,553 ) (7,102 ) 48.6 % (18,797 ) (14,866 ) 26.4 % All Other (2,243 ) (1,902 ) 17.9 % (4,296 ) (3,177 ) 35.2 % Subscription cancellations total (20,219 ) (12,605 ) 60.4 % (35,632 ) (26,010 ) 37.0 % Net new recurring subscription sales Index 12,853 15,925 (19.3 %) 26,791 28,888 (7.3 %) Analytics 4,426 6,567 (32.6 %) 7,400 11,554 (36.0 %) All Other 10,105 6,112 65.3 % 16,221 12,052 34.6 % Net new recurring subscription sales total 27,384 28,604 (4.3 %) 50,412 52,494 (4.0 %) Non-recurring sales Index 10,450 5,982 74.7 % 20,733 11,063 87.4 % Analytics 1,659 2,631 (36.9 %) 4,924 5,208 (5.5 %) All Other 574 630 (8.9 %) 1,605 1,084 48.1 % Non-recurring sales total 12,683 9,243 37.2 % 27,262 17,355 57.1 % Gross sales Index$ 30,726 $ 25,508 20.5 %$ 60,063 $ 47,918 25.3 % Analytics 16,638 16,300 2.1 % 31,121 31,628 (1.6 %) All Other 12,922 8,644 49.5 % 22,122 16,313 35.6 % Total gross sales$ 60,286 $ 50,452 19.5 %$ 113,306 $ 95,859 18.2 % Net sales Index$ 23,303 $ 21,907 6.4 %$ 47,524 $ 39,951 19.0 % Analytics 6,085 9,198 (33.8 %) 12,324 16,762 (26.5 %) All Other 10,679 6,742 58.4 % 17,826 13,136 35.7 % Total net sales$ 40,067 $ 37,847 5.9 %$ 77,674 $ 69,849 11.2 % 37
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A significant portion ofMSCI 's operating revenues are derived from subscriptions or licenses of products and services, which are provided over contractually-agreed periods of time that are subject to renewal or cancellation at the end of current contract terms. As ofJune 30, 2020 , cancellations have not deviated significantly from historical levels as a result of the COVID-19 pandemic. However, new sales could moderate and cancellations could increase in the near term as a result of the COVID-19 pandemic.
Retention Rate
The following table presents our Retention Rate by reportable segment for the periods indicated:
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Index 94.7% 97.1% 95.5% 96.8% Analytics 92.0% 94.2% 92.9% 94.0% All Other 94.1% 93.9% 94.4% 94.9% Total 93.5% 95.5% 94.2% 95.4% Retention Rate is an important metric because subscription cancellations decrease ourRun Rate and ultimately our operating revenues over time. The annual Retention Rate represents the retained subscriptionRun Rate (subscriptionRun Rate at the beginning of the fiscal year less actual cancels during the year) as a percentage of the subscriptionRun Rate at the beginning of the fiscal year. The Retention Rate for a non-annual period is calculated by annualizing the cancellations for which we have received a notice of termination or for which we believe there is an intention not to renew during the non-annual period, and we believe that such notice or intention evidences the client's final decision to terminate or not renew the applicable agreement, even though such notice is not effective until a later date. This annualized cancellation figure is then divided by the subscriptionRun Rate at the beginning of the fiscal year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Retention Rate for the period. Retention Rate is computed by operating segment on a product/service-by-product/service basis. In general, if a client reduces the number of products or services to which it subscribes within a segment, or switches between products or services within a segment, we treat it as a cancellation for purposes of calculating our Retention Rate except in the case of a product or service switch that management considers to be a replacement product or service. In those replacement cases, only the net change to the client subscription, if a decrease, is reported as a cancel. In the Analytics and the ESG operating segments, substantially all product or service switches are treated as replacement products or services and netted in this manner, while in our Index and Real Estate operating segments, product or service switches that are treated as replacement products or services and receive netting treatment occur only in certain limited instances. In addition, we treat any reduction in fees resulting from a down-sale of the same product or service as a cancellation to the extent of the reduction. We do not calculate Retention Rate for that portion of ourRun Rate attributable to assets in index-linked investment products or futures and options contracts, in each case, linked to our indexes. In our product lines, Retention Rate is generally higher during the first three quarters and lower in the fourth quarter, as the fourth quarter is traditionally the largest renewal period in the year.
Critical Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, "Introduction and Basis of Presentation," of the Notes to Consolidated Financial Statements included in our Form 10-K and also in Note 2, "Recent Accounting Standards Updates," in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. There have been no significant changes in our accounting policies or critical accounting estimates since the end of the fiscal year endedDecember 31, 2019 other than those described in Note 2, "Recent Accounting Standards Updates" in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.
Liquidity and Capital Resources
We require capital to fund ongoing operations, internal growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, existing cash and cash equivalents and credit capacity under our existing credit facility. In addition, we believe we have access to additional funding in the public and private markets. We intend to use these sources of liquidity to, among other things, service our existing and future debt obligations, fund our working capital requirements for capital expenditures, investments, acquisitions and dividend payments, and repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition and strategic partnership opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth. 38 --------------------------------------------------------------------------------
Senior Notes and Credit Agreement
We have an aggregate of$3,400.0 million in Senior Notes outstanding and a$400.0 million undrawn Revolving Credit Agreement with a syndicate of banks. See Note 7, "Commitments and Contingencies," of the Notes to Unaudited Condensed Consolidated Financial Statements included herein for additional information on our Senior Notes and Revolving Credit Agreement. The Senior Notes and the Revolving Credit Agreement are fully and unconditionally, and jointly and severally, guaranteed by our direct or indirect wholly owned domestic subsidiaries that account for more than 5% of our and our subsidiaries' consolidated assets, other than certain excluded subsidiaries (the "subsidiary guarantors"). Amounts due under the Revolving Credit Agreement are our and the subsidiary guarantors' senior unsecured obligations and rank equally with the Senior Notes and any of our other unsecured, unsubordinated debt, senior to any of our subordinated debt and effectively subordinated to our secured debt to the extent of the assets securing such debt. The indentures governing our Senior Notes (the "Indentures") among us, each of the subsidiary guarantors, andWells Fargo Bank, National Association , as trustee, contain covenants that limit our and certain of our subsidiaries' ability to, among other things, incur liens, enter into sale/leaseback transactions and consolidate, merge or sell all or substantially all of our assets. In addition, the Indentures restrict our non-guarantor subsidiaries' ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiaries guaranteeing the Senior Notes on a pari passu basis. The Revolving Credit Agreement contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to:
• incur liens and further negative pledges;
• incur additional indebtedness or prepay, redeem or repurchase indebtedness;
• make loans or hold investments; • merge, dissolve, liquidate, consolidate with or into another person; • enter into acquisition transactions; • enter into sale/leaseback transactions; • issue disqualified capital stock; • sell, transfer or dispose of assets;
• pay dividends or make other distributions in respect of our capital stock
or engage in stock repurchases, redemptions and other restricted payments;
• create new subsidiaries; • permit certain restrictions affecting our subsidiaries;
• change the nature of our business, accounting policies or fiscal periods;
• enter into any transactions with affiliates other than on an arm's-length
basis; and
• amend our organizational documents or amend, modify or change the terms of
certain agreements relating to our indebtedness.
The Revolving Credit Agreement and the Indentures also contain customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, bankruptcy and insolvency events, invalidity or impairment of loan documentation or collateral, change of control and customary ERISA defaults. None of the restrictions above are expected to impact our ability to effectively operate the business. The Revolving Credit Agreement also requires us and our subsidiaries to achieve financial and operating results sufficient to maintain compliance with the following financial ratios on a consolidated basis through the termination of the Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall not exceed 4.25:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As ofJune 30, 2020 , our Consolidated Leverage Ratio was 3.40:1.00 and our Consolidated Interest Coverage Ratio was 5.98:1.00. As ofJune 30, 2020 , there were no amounts drawn and outstanding under the Revolving Credit Agreement. 39 --------------------------------------------------------------------------------
Our non-guarantor subsidiaries under the Senior Notes consist of: (i) domestic subsidiaries of the Company that account for 5% or less of consolidated assets of the Company and its subsidiaries and (ii) any foreign or domestic subsidiary of the Company that is deemed to be a controlled foreign corporation within the meaning of Section 957 of the Internal Revenue Code of 1986, as amended. Our non-guarantor subsidiaries accounted for approximately$925.6 million , or 56.9%, of our total revenue for the trailing 12 months endedJune 30, 2020 , approximately$310.5 million , or 37.7%, of our consolidated operating income for the trailing 12 months endedJune 30, 2020 , and approximately$891.9 million , or 21.2%, of our consolidated total assets (excluding intercompany assets) and$614.1 million , or 13.7%, of our consolidated total liabilities, in each case as ofJune 30, 2020 . Share Repurchases
The following table provides information with respect to repurchases of the Company's common stock pursuant to open market repurchases:
Average Total Dollar Price Number of Value of Paid Per Shares Shares Six Months Ended Share Repurchased Repurchased (in thousands) June 30, 2020$ 250.65 1,423$ 356,770 June 30, 2019$ 147.97 690$ 102,081
As of
Cash Dividend
OnJuly 27, 2020 , the Board of Directors declared a quarterly cash dividend of$0.78 per share for the three months endingSeptember 30, 2020 . This reflects an increase of 14.7% over the quarterly cash dividend declared for the three months endedJune 30, 2020 . The third quarter 2020 dividend is payable onAugust 31, 2020 to shareholders of record as of the close of trading onAugust 14, 2020 . Cash Flows As of June 30, December 31, 2020 2019 (in thousands) Cash and cash equivalents$ 1,384,977 $ 1,506,567 Cash and cash equivalents were$1,385.0 million and$1,506.6 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. We typically seek to maintain minimum cash balances globally of approximately$200.0 million to$250.0 million for general operating purposes but may maintain higher minimum cash balances while the COVID-19 pandemic continues to impact global economic markets. As ofJune 30, 2020 andDecember 31, 2019 ,$336.0 million and$321.2 million , respectively, of the cash and cash equivalents were held by foreign subsidiaries. As a result of Tax Reform, we can now more efficiently access a significant portion of our cash held outside of theU.S. in the short-term without being subject toU.S. income taxes. Repatriation of some foreign cash may still be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. The global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purposes or other needs, including acquisitions or expansion of our products. We believe that global cash flows from operations, together with existing cash and cash equivalents and funds available under our existing credit facility and our ability to access the debt and capital markets for additional funds, will continue to be sufficient to fund our global operating activities and cash commitments for investing and financing activities, such as material capital expenditures and share repurchases, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect that foreign cash flows from operations, together with existing cash and cash equivalents will continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. 40 --------------------------------------------------------------------------------
Net Cash Provided by (Used In) Operating, Investing and Financing Activities Six Months EndedJune 30, 2020 2019 (in thousands)
Net cash provided by operating activities
(8,751 ) 1,672 Net decrease in cash$ (121,590 ) $ (133,059 )
Cash Flows From Operating Activities
Cash flows from operating activities consist of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was$375.4 million and$277.3 million for the six months endedJune 30, 2020 and 2019, respectively. The year-over-year increase was primarily driven by higher cash collections from customers and the benefit of lower payments for income taxes, partially offset by higher interest payments. As a result of a provision within the Cares Act, we have elected to defer estimated payments for income taxes for the year endingDecember 31, 2020 that historically would have been paid in the six months endedJune 30, 2020 into the month ofJuly 2020 . Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year. Cash flows from operating activities for the year endingDecember 31, 2020 are expected to decrease from those for the year endedDecember 31, 2019 , in part, from the impact of the COVID-19 pandemic.
Cash Flows From Investing Activities
Cash used in investing activities was$213.2 million for the six months endedJune 30, 2020 compared to$20.5 million for the six months endedJune 30, 2019 . The year-over-year change was primarily driven by the$190.8 million investment in Burgiss. We expect to continue to invest in the business despite the COVID-19 pandemic, with cash flows for capital expenditures for the year endingDecember 31, 2020 expected to increase from the year endedDecember 31, 2019 .
Cash Flows From Financing Activities
Cash used in financing activities was$275.1 million for the six months endedJune 30, 2020 compared to$391.5 million for the six months endedJune 30, 2019 . The year-over-year change was primarily driven by the impact of the 2031 Senior Notes and 2030 Senior Notes offerings inMay 2020 andFebruary 2020 , respectively. This was partially offset by the early redemptions of the 2025 Senior Notes and 2024 Senior Notes, as well as the impact of higher share repurchases.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 41
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